Understanding How Scalping Works in Forex Trading
Forex trading can be done short term or long term. Most of the day traders are short term traders who open positions each day and close those positions before the close of the day. Some traders use fundamental analysis as a trading strategy. They are usually long term traders opening a trade for a few weeks or a few months.
Most of the day traders are short term traders. Day traders love scalping. A position is opened and closed within minutes making a few pips per trade.
Scalping is based on the fact that most of the time the market is ranging. Ranging means there is no significant price volatility. A scalper tries to make 2-5 pips per trade.
When the market is consolidating and ranging best suits the scalpers. For example between the close of the US market and the open of the European market, forex markets tend to be ranging for hours. This is the best time for scalpers.
If you are interested in scalping then you need to make more pips per trade than the pips spread offered by your broker. The spread is your cost of trading. So if the spread is 4 pips. You need to make more than 4 pips for each trade just in order to break even.
In order to become a successful scalper, you need to understand technical analysis well. You should have clear idea of over/under brought, support and resistance zones, trendlines, trading channels etc.
Forex brokers dont like scalpers. Many will try to ban you on one pretext or another if you are using scalping as your trading strategy. So, first check with your broker before adopting this style of trading.
Since scalping means a few pips per trade, in order to make 20-50 pips per day, you will have to trade many times. Dont forget these 20-50 pips are after you have subtracted the trading cost.
In order to make good profit with scalping you will have to use high leverage. Is it a good thing?
Leverage is dangerous. It is a double edged sword that cuts both ways. Leverage helps you if market favors you but it will destroy you if the market does not favor you. So beware of using too much leverage while trading.
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